By: Dr. Mike Campbell
You’d have thought that if the world’s political classes had learned a single thing from the global financial crisis it would be that sovereign debt must be paid down. The crisis in Greece was not caused by borrowing per se, but rather by a loss of confidence that the Greeks could continue to make interest repayments and meet their obligations – in the end, this fear has been proven to be justified. Even as the ink dries on the accord to grant Greece a further €130 billion, murmurs of concern are being voiced that even this gargantuan loan may not be enough to save Greece.
In Japan and America, public debt runs to something like $15 trillion and $12 trillion or roughly 69.4 and 208% respectively. Whilst the credit worthiness of the world’s largest and third largest economies has never come under serious challenge, even a modest rise in the interest rates that they pay to sustain their borrowing would be very painful – one percent of a trillion Dollars is 10 billion. Between 1998 and 2010, the yield on Greek 10-year bonds was less than 5%; they peaked at 37.1% this month (but making that investment would be like buying tickets for the Titanic after it hit the iceberg). The moral of the story is that uncertain times drive up yields on debt vehicles.
The UK government is toying with the idea of issuing super-long term bonds with lifetimes of up to 100 years (or even longer). The idea of these would be to put the nation’s borrowing (or a fair proportion of it) into these vehicles and profit from the current low level of interest. Of course, interest levels are at historically low rates to try to stimulate the economy after the global financial crisis. Whilst it is logical that a borrower secures the best rate possible for a loan, there is something altogether unsavoury in saddling our great grandchildren with debts because of our spending profligacy – but then they don’t have the vote yet, not even having been born yet.